In this article, we will go through the meaning and examples of general ledger. We will cover the following:
What is a General Ledger?
General Ledger in simple language is grouping of transactions of similar nature. An organization has multiple transactions in a day. Every transaction leads to two entries as per the double entry system of bookkeeping. These entries are then posted in respective accounts called ledgers.
Examples: Let us assume, an organization Apple Ltd trades in fruits. It sells 20 kilos of strawberries at Rs. 100 per kilo to its buyer for cash on 8th August. The entry will be
| Cash A/C | Dr | 20000 | ||
| To Sales A/C | 20000 |
(Being 20 kilos strawberry sold to ABC at Rs. 100 per kilo) Now this entry will be posted to the respective ledgers in the following manner
Cash A/C | |||||
|---|---|---|---|---|---|
Dr. | Cr. | ||||
| Date | Description | Amount (Rs) | Date | Description | Amount (Rs) |
| 8.8.2018 | To Sales | 20000 | |||
Similarly, in Sales account, the entry will reflect as follows
Sales A/C | |||||
|---|---|---|---|---|---|
Dr. | Cr. | ||||
| Date | Description | Amount (Rs) | Date | Description | Amount (Rs) |
| 8.8.2018 | By Cash | 20000 | |||
Posting of debit and credit part of entries will be carried on for every journal entry resulting from transactions. With automation playing its role, this cumbersome process of posting has been simplified. Posting of entry into respective ledgers takes place on the real-time basis and no manual intervention is required.
Simplified meaning of General Ledger and Process
Let us simplify this concept with the following illustration: We pay monthly bills for credit cards, mobile phones, electricity, etc. Over a period of one year, we may want to analyze our expenses. We have filed all the bills in a single file, then we will have to find every bill month wise and then total that head of expense and then compare the various expenses. But this task will be simplified if we categorize the bills according to the relevant expenses and file it accordingly from the beginning of the year.
For example all mobile bills in one file, all credit card bills in one file and so on. We can analyze the expenses with a lot of ease. Similarly as and when transactions are entered into, the resultant entries are categorized and placed in ledgers. These ledgers are then totalled at period end to form a Trial balance.
Classification of General Ledgers
General ledgers are classified according to their nature. This classification facilitates the preparation of financial statements. The classification is as follows:
- Expense Ledgers:All expenses incurred will be posted in this ledger. Purchase Account, Rent Account, Electricity account, Maintenance Account and the like will all fall under this category.
- Income ledgers:All income accrued/earned will be posted in this account. Sales, interest received, Discounts received accounts will fall under this category.
- Capital ledger:All accounts pertaining to Capital introduced/drawings will fall under this ledger.
- Asset ledger:All accounts pertaining to assets will be posted in this ledger. Cash, Bank, Debtors, Machinery, Furniture accounts and the like will fall under this category.
- Liability ledger:All accounts pertaining to debts or obligations of the organization will be posted here. This will include Borrowings, Creditors, Accounts payable and so on.
Benefits of General Ledger
- The general ledger provides the position of the business at any given point of time. For example an Cash ledger will reflect the cash in hand as on date, the bank ledger will reflect the bank balance.
- It facilitates Bank Reconciliation since all the transactions pertaining to a single bank account are recorded in a single place. A
- lso since the ledgers are classified at the time of creation itself, an organization can view all its debtors ledgers at one go.
- For auditors, the general ledger is an insight to an organization’s transactions. Detailed analysis of ledgers can give the auditors a deep understanding of the business.
The very base of accounting is Journal entry and General Ledger is the skilful grouping and presentation of the Journal entries. General ledgers provide structure to accounting and facilitate preparations of trial balance which in turn facilitates preparation of financial statements.
Control Accounts
With the automation of accounts, along with manual data entry there are also some system generated entries. Hence ledgers from a robust ERP system will reflect entries from various sub systems integrated in one ledger. The entries from sub systems will have a particular transaction code and can be easily identified. Similarly, system generated entries have specific codes and can be identified.
Also, the concept of subsidiary ledgers and main ledgers has become imperative with the advent of automation. All data entry is performed on a subsidiary system and the only a summary is posted to the accounting system.
